Charges push IBM earnings down 97%

MikeTarsala

ARMONK, N.Y. (CBS.MW) -- IBM's net income plummeted 97 percent due to $2.1 billion in pre-tax charges for job cuts and restructuring, as the world's largest technology company struggled with withering product demand that hit hardware and services sales.

For the second quarter, ended June, IBM
IBM, -1.04%
reported its net income Wednesday from all operations was $56 million, or 3 cents a share, compared with $2 billion, or $1.15 a share, in the second quarter of 2001.

Big Blue racked up $825 million in charges for the reorganization of its microelectronics business, an $802 million hit for job cuts in other parts of the company, and a $428 million write-off for the discontinuation and sale of its hard disk-drive business to Hitachi.
HIT, -14.29%

Shares of IBM were little changed in after-hours action. Ahead of its earnings announcement, the stock rose $1.68 to $70.69 in regular trading on the New York Stock Exchange.

The computer and hardware service company's net income from continuing operations was $445 million, down 79 percent from $2.1 billion in the year-ago period.

IBM reported sales of $19.7 billion, including the results from its hard disk-drive business, beating Wall Street expectations of $19.4 billion. Total revenue dropped 6 percent from the same period last year.

"We are getting out in front of the industry shifts to build on our financial competitiveness," said John Joyce, IBM's chief financial officer, on a conference call. "We continue to improve our position in the industry for when demand picks up."

The restructuring ensures that Big Blue is focused on profitable sales growth going forward, Joyce said. In particular, the second-quarter charges will allow IBM to focus a larger percentage of its resources on copper chip manufacturing, rather than lower-margin aluminum ones, and on building its advanced chip-foundry business.

"Key for IBM is its top-line growth, and I think from here, I think the company is going to get it in the fourth quarter," said Pravin Banker, founder of The Financial Network Inc., a Greenwich, Conn.-based investment bank. "The competition is hurting, and IBM is cranking up to sell into a weak environment."

Excluding all charges, the company said its earnings were $1.45 billion, or 84 cents a share. IBM claims that it earned 89 cents a share from continuing operations, not including charges. Analysts on average projected earnings of 83 cents a share, down 28 percent from the year-ago period, according to Thomson Financial/First Call, on a sales drop of about 10 percent. See earnings preview.

By all appearances, IBM beat analyst expectations -- although it's not clear by how much. Some analysts adjusted for IBM's June sale of its hard disk-drive business, while others did not, possibly skewing the consensus numbers.

Going forward, management said the company's restructuring actions and job cuts are expected to mostly offset a continued slide in technology demand in the second half. The company said it anticipates meeting analysts' consensus earnings target of $3.97 for all of 2002.

"In this difficult environment, we are not suggesting precision," Joyce added. To meet the target, IBM must meet current expectations of earning about $1 a share in the third quarter, ended September, and $1.46 a share in the December period.

From continuing operations, IBM's sales in the Americas were $9 billion, down 5 percent from the same period last year. Revenue from the Europe/Middle East/Africa region was $5.6 billion, down 3 percent. Sales in the Asia-Pacific region fell 3 percent to $4.1 billion Sales of technologies to other tech organizations fell 32 percent to $844 million.

Continuing a trend in recent quarters, IBM's flagship services organization saw sales declines -- this time a drop of 1 percent to $8.7 billion. The company signed only $10.6 billion in service contracts in the quarter -- well short of management's goal of about $14 billion. Joyce acknowledged that Big Blue was unable to sign three large contracts in the quarter, and the company has been forced to scale back some customer projects -- especially in the telecommunications industry.

IBM's hardware revenue was hit hard, due to slack demand that hit most of its competitors. Sales declined 16 percent from the same period last year, to $6.7 billion. But management said the company did better than expected with PC server sales, and that sales of Z-series mainframes increased 4 percent.

A bright spot was software revenue, which increased 8 percent to $3.3 billion. The company said "middleware" software, which includes the company's DB2 database that competes with Oracle Corp.'s main product, surged 10 percent.

The company cited balance sheet strength, although IBM reported $3.57 billion of cash on its balance sheet, down from $3.97 billion in the previous quarter. The company spent about $1.8 billion on stock repurchases in the second quarter.

IBM's tax rate for continuing operations in the quarter was 25.3 percent, down from around 29 percent in the previous quarter, due mainly to the charges. The rate remains lower than many of IBM's hardware and software competitors.

Joyce said that the company is "starting to think about" changing the assumption that the company pension plan will grow 9.5 percent annually -- a change that would negatively affect earnings. He said that the company would not have to make a change until early next year.

"We are looking at ways to offset the change in that rate," Joyce said.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.